H Y P E R I O N
2002
TERM TRUST
Semi-Annual
November 30, 1998
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HYPERION 2002 TERM TRUST, INC.
Report of the Investment Advisor
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January 22, 1999
Dear Shareholder:
We welcome this opportunity to provide you with information about Hyperion 2002
Term Trust, Inc. (the "Trust") for its semi-annual period ended November 30,
1998, and to share our outlook for the rest of the Trust's fiscal year. The
Trust's shares are traded on the New York Stock Exchange ("NYSE") under the
symbol "HTB".
Description Of The Trust
The Trust is a closed-end investment company whose investment objectives are to
provide a high level of current income consistent with investing only in
securities of the highest credit quality and to return $10.00 per share (the
initial public offering price per share) to investors on or shortly before
November 30, 2002. The Trust pursues these investment objectives by investing in
a portfolio primarily of mortgage-backed securities ("MBS") issued or guaranteed
by the U.S. Government or one of its agencies or instrumentalities, or MBS rated
AAA by a nationally recognized rating agency (e.g., Standard & Poor's
Corporation or Fitch IBCA, Inc.).
Market Environment
This past year was a very challenging period for the markets. The problems in
the global economy caused volatility in both the fixed income and equity
markets. Prices on U.S. Treasuries increased, but other sectors of the market
did not fare as well. Prices on MBS increased in general, but to a lesser amount
than anticipated as prepayment risk increased. Credit related securities like
corporate bonds also lagged, due to credit concerns and fears of an economic
recession.
Two seemingly contradictory events needed to take place before any semblance of
order could be restored to the markets. First, there had to be a significant
deleveraging of portfolios; and, second, there had to be a reassertion of
economic leadership on the part of both the U.S. and foreign governments.
Surprisingly, both of these occurred in the fourth quarter. The deleveraging of
portfolios occurred as a result of the implementation of stricter lending
standards for all types of companies and portfolios. This forced these
institutions to sell securities into the market and reduce market risk.
Similarly, the lowering of administered interest rates by both the U.S. Federal
Reserve Bank and its European counterparts clearly demonstrated a commitment to
maintain the positive forward movement of these respective economies. Over the
period, the Federal Funds rate dropped by 75 basis points.
By the end of the year, the fixed income markets appeared to be more sound. The
"flight-to-quality" subsided, interest rates reversed some of their declines
but, more importantly, the performance of corporate bonds and MBS began to
recover. Below is a chart showing the changes in interest rates and yield
spreads for various sectors of the fixed income market.
HYPERION 2002 TERM TRUST, INC.
Report of the Investment Advisor
Graph: The graph depicts the differences in yield spreads
between the GNMA current coupon, 10 year Treasury,
2 year Treasury, and AAA Corporates for the period
between September 30, 1998 and December 30, 1998.
We believe that the fixed income market will reverse course in 1999. We
expect interest rates to increase slightly during the year.
This is primarily due to the continued strength of the U.S. economy. For
the last 18 months, the U.S. economy has been an oasis of prosperity
in the global community. The problems in Asia, Russia, and Latin America
have failed to slow the U.S. economy. Weakness in manufacturing and
other export-dependent companies has been more than compensated for in
other areas, such as high-technology, bio-technology, and Internet-oriented
companies.
We target a 5.5% to 6.0% yield level on 30-year U.S. Treasury Bonds in 1999.
This interest rate environment should be favorable for MBS, as higher interest
rates should reduce prepayment risk. The market environment should also be
supportive of credit-related securities, as the strong economy should keep
credit problems at a minimum.
Portfolio Strategy and Performance Over the last few months, as interest rates
have decreased, the prices of security holdings in the portfolio have increased.
As a result, we have taken the opportunity to selectively sell securities and
reinvest the proceeds into well-structured mortgage and asset-backed securities
with maturities that are consistent with the termination date of the Trust. In
the process, we reduced the portfolio's exposure to prepayment risk by
reinvesting into securities with lower coupon collateral, or by reinvesting into
securities which, because of their structure or nature, are less sensitive to
prepayment risk. Over 47% of the portfolio was restructured in this fashion over
the last six months.
The portfolio's allocation to asset-backed securities increased slightly over
the period. Currently, over 90% of the holdings are targeted to the stated
maturity of the Trust. As of the end of December, the Trust, inclusive of
leverage, had an average duration (duration measures a bond portfolio's price
sensitivity to interest rate changes) of 3.9 years; the core (non-levered)
assets had a duration of 2.8 years.
The Trust's total return based on Net Asset Value for the six month period
ending November 30, 1998, was 4.00%. Total return is based upon the change in
Net Asset Value of the Trust's shares and includes reinvestment of dividends.
The current monthly dividend the Trust pays its shareholder is $0.03958 per
share. The current yield of 5.67% on shares of the Trust is based on the NYSE
closing price of $8.3750 on November 30, 1998.
The Trust is continuing its share repurchase program. This repurchase program
allows the Trust to purchase and retire shares of the Trust in the open
marketplace. Such transactions have been made when the share price of the Trust
was significantly below the Trust's NAV. By purchasing the shares at a discount
to the NAV and retiring them, the Trust recaptures the spread (between share
purchase price and the NAV) by the Trust which benefits all of the Trust's
remaining shareholders. During the period ended November 30, 1998, the Trust has
repurchased and retired 441,600 shares, capturing $0.0135 in additional NAV per
share, or $409,730 in an actual dollar amount for shareholders.
The chart that follows shows the allocation of the Trust's holdings by asset
category on November 30, 1998.
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1998 *
Pie Chart
U.S. Government Agency Collateralized Mortgage Obligations 67.4%
Asset-Backed Securities 23.0%
Municipal Zero Coupon Securities 9.2%
Repurchase Agreement 0.4%
*As a percentage of total investments
Conclusion
We appreciate the opportunity to serve your investment needs. As always, we
welcome your questions and comments and encourage you to contact our Shareholder
Services Representatives at
1-800-HYPERION.
Sincerely,
ANDREW M. CARTER CLIFFORD E. LAI
Director and Chairman of the Board President
Hyperion 2002 Term Trust, Inc. Hyperion 2002 Term Trust, Inc.
Chairman and Chief Executive Officer, President and Chief Investment Officer,
Hyperion Capital Management, Inc. Hyperion Capital Management, Inc.
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HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments
November 30, 1998 (unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 93.4%
U.S. Government Agency Collateralized Mortgage Obligations (REMICs) - 93.4%
Federal Home Loan Mortgage Corporation
Series 1998, Class PE 5.50% 11/18/15 $ 20,000 $ 19,890,012
Series 1628, Class G 5.85 08/15/19 14,000 14,009,800
Series 2021, Class PN 6.00 08/15/17 30,125 @ 30,312,842
Series 2085, Class PA 6.00 07/15/17 30,000 30,149,400
----------------------
94,362,054
----------------------
Federal National Mortgage Association
Series 1998-4, Class PA 6.00 02/18/16 66,907 @ 67,258,832
Series 1998-45, Class PC 6.00 11/18/15 21,510 @ 21,605,504
Series 1998-45, Class PD 6.00 04/18/18 28,717 @ 28,860,298
Series 1998-36, Class PA 6.25 07/18/13 28,376 @ 28,546,094
Series 1997-58, Class PH 6.50 06/18/18 15,610 15,740,187
Series 1998-6, Class S 9.53 02/18/28 4,888 5,016,408
----------------------
167,027,323
----------------------
Total U.S. Government Agency Collateralized Mortgage Obligations (REMICs)
(Cost - $ 260,946,486 ) 261,389,377
----------------------
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ASSET-BACKED SECURITIES - 31.9%
Chase Credit Card Master Trust
Series 1997-5, Class A 6.19 08/15/05 20,000 20,612,690
----------------------
Chemical Master Credit Card Trust I
Series 1995-3, Class A 6.23 04/15/05 19,813 20,409,312
----------------------
Salomon Brothers Mortgage Securities VII
Series 1998-NC3, Class B 6.46 08/25/28 10,000 9,951,700
----------------------
Sears Credit Agreement Master Trust
Series 1996-3, 4CTF Class A 6.45 10/16/06 20,000 20,494,800
----------------------
Structured Mortgage Asset Securities Corp.
Series 1992-M1, Class A2 7.05 11/25/02 17,077 17,814,552
----------------------
Total Asset-Backed Securities
(Cost - $ 86,265,713 ) 89,283,054
----------------------
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MUNICIPAL ZERO COUPON SECURITIES - 12.7%
Massachusetts - 4.3%
Massachusetts State
Series B, FGIC 3.(a) 06/1/02 5,000 4,365,795
Series B, AMBAC 3.(a) 08/1/02 8,830 7,660,396
----------------------
12,026,191
----------------------
Pennsylvania - 3.5%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue Bonds, FGIC 4.(a) 09/01/03 12,000 9,922,536
----------------------
Texas - 2.3%
San Antonio Texas, Electric & Gas
Revenue Bonds, AMBAC 3.(a) 02/01/03 7,500 6,366,165
----------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
MUNICIPAL ZERO COUPON SECURITIES - (continued)
Utah - 2.6%
Intermountain Power Agency, Utah Power Supply
Series B, Revenue Bonds, AMBAC 4.(a) 07/01/02 $ 8,490 $ 7,347,789
----------------------
Total Municipal Zero Coupon Securities
(Cost - $ 32,646,360 ) 35,662,681
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REPURCHASE AGREEMENT - 0.5%
Dated 11/30/98, with State Street Bank and Trust Company;
proceeds: $1,387,193; collateralized by $1,060,000
U.S. Treasury Note, 7.875%, due 02/15/21, value: $1,413,429
(Cost - $ 1,387,000 ) 5.00 12/02/98 1,387 1,387,000
----------------------
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TOTAL INVESTMENTS - 138.5%
(Cost - $ 381,245,559 ) $ 387,722,112
Liabilities in Excess of Other Assets - (38.5%) (107,836,268)
----------------------
NET ASSETS - 100.0% $ 279,885,844
======================
</TABLE>
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@ - Portion of or entire principal amount delivered to
counterparty as collateral for reverse repurchase
agreements (Note 5).
(a) - Zero Coupon Bonds. Interest rate Represents yield to maturity.
AMBAC - Insured by American Municipal Bond Assurance Corporation.
FGIC - Financial Guaranty Insurance Company.
REMIC - Real Estate Mortgage Investment Conduit.
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See notes to financial statements.
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Statement of Assets and Liabilities
November 30, 1998 (unaudited)
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<TABLE>
<S> <C>
Assets:
Investments, at value (cost $381,245,559) $ 387,722,112
Interest receivable 2,438,695
Principal paydowns receivable 834,325
Prepaid expenses and other assets 160,392
----------------
Total assets 391,155,524
----------------
Liabilities:
Reverse repurchase agreements (Note 5) 110,037,000
Temporary bank overdraft 917,538
Interest payable for reverse repurchase agreements (Note 5) 229,170
Accrued expenses and other liabilities 85,972
----------------
Total liabilities 111,269,680
----------------
Net Assets (equivalent to $ 9.19 per share based on 30,446,839
shares issued and outstanding) $ 279,885,844
=================
Composition of Net Assets:
Capital stock, at par ($.01) (Note 6) $ 304,468
Additional paid-in capital (Note 6) 295,396,847
Undistributed net investment income 8,886,660
Accumulated net realized losses (31,178,684)
Net unrealized appreciation 6,476,553
----------------
==============
Net assets applicable to capital stock outstanding $ 279,885,844
================
</TABLE>
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See notes to financial statements.
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HYPERION 2002 TERM TRUST, INC.
Statement of Operations
For the Six Months Ended November 30, 1998 (unaudited)
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Investment Income (Note 2):
Interest $ 12,754,044
---------------
Expenses:
Investment advisory fee (Note 3) 707,139
Administration fee (Note 3) 213,583
Insurance 73,609
Custodian 39,957
Reports to shareholders 28,580
Accounting and tax services 16,497
Directors' fees 23,955
Registration 16,119
Transfer agency 14,447
Legal 3,736
Miscellaneous 30,685
---------------
Total operating expenses 1,168,307
Interest expense (Note 5) 3,526,167
---------------
Total expenses 4,694,474
---------------
Net investment income 8,059,570
---------------
Realized and Unrealized Gains (Losses) on Investments
(Note 2):
Net realized losses on investment transactions 3,769,062
Net change in unrealized depreciation on investments (1,812,053
---------------
Net realized and unrealized loss on investment
transactions 1,957,009
---------------
Net increase in net assets resulting from operations $ 10,016,579
===============
See notes to financial statements.
<TABLE>
<S> <C> <C>
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HYPERION 2002 TERM TRUST, INC. For the Six
Statements of Changes in Net Assets Months Ended For the Year
November 30, 1998 Ended
(unaudited) May 31, 1998
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Increase in Net Assets Resulting from Operations:
Net investment income $ 8,059,570 $ 17,214,656
Net realized gains on investments, short sales, futures
and option transactions 3,769,062 16,054,451
Net change in unrealized appreciation on investments (1,812,053) 3,067,190
----------------------- -------------------
Net increase in net assets resulting from operations 10,016,579 36,336,297
----------------------- -------------------
Dividends to Shareholders (Note 2):
Net investment income (7,300,735) (15,068,145
----------------------- -------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired (3,689,785) (23,762,315)
----------------------- --------------------
Total decrease in net assets (973,941) (2,494,163)
Net Assets:
Beginning of period 280,859,785 283,353,948
----------------------- --------------------
End of period (including undistributed net investment income
of $8,886,660 and $8,127,825, respectively) $ 279,885,844 $ 280,859,785
======================= ====================
</TABLE>
See notes to financial statements.
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HYPERION 2002 TERM TRUST, INC.
Statement of Cash Flows
For the Six Months Ended November 30, 1998 (unaudited)
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<TABLE>
<S> <C>
Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $854,882) $ 11,660,614
Interest expense paid (3,487,290)
Operating expenses paid (1,946,503)
Purchase of short-term portfolio investments, including options, net (441,000)
Purchase of long-term portfolio investments (204,352,635)
Proceeds from dispositions of long-term portfolio investments and
principal paydowns 231,615,364
------------------------
Net cash provided by operating activities 33,048,550
------------------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares (3,893,660)
Net cash used for reverse repurchase agreements (22,782,750)
Cash dividends paid (7,300,735)
------------------------
Net cash used for financing activities (33,977,145)
------------------------
Net increase in cash (928,595)
Cash at beginning of period 11,057
------------------------
Temporary bank overdraft at end of period $ (917,538)
========================
Reconciliation of Net Increase in Net Assets Resulting from
Operations to Net Cash Provided by Operating Activities:
Net increase in net assets resulting from operations $ 10,016,579
------------------------
Decrease in investments 21,973,277
Decrease in net unrealized appreciation on investments 1,812,053
Increase in interest receivable (14,040)
Increase in other assets (748,206)
Decrease in other liabilities 8,887
------------------------
Total adjustments 23,031,971
-----------------------
Net cash provided by operating activities $ 33,048,550
========================
</TABLE>
See notes to financial statements.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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HYPERION 2002 TERM TRUST, INC.
Financial Highlights For the Six Month For the Year For the Year For the Year For the Year For the Year
Ended Nov. 30, Ended Ended Ended Ended Ended
1998 (unaudited) May 31, 1998 May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value
beginning of period $ 9.09 $ 8.35 $ 7.98 $ 8.46 $ 8.07 $ 9.05
-------------- -------------- --------------- ------------- -------------- --------------
Net investment income 0.27 0.27 0.60 0.58 0.67 0.68
Net realized and unrealized gain
(loss) on investment, short sale,
futures and option transactions 0.06 0.62 0.24 (0.54) 0.34 (0.95)
-------------- -------------- --------------- ------------- -------------- --------------
Net increase (decrease) in net
asset value resulting from
operations 0.33 0.89 0.84 0.04 1.01 (0.27)
Net effect of shares repurchased 0.01 0.09 0.05 0.01 0.01 0.01
Dividends from net investment
income (0.24) (0.24) (0.52) (0.53) (0.63) (0.72)
-------------- -------------- --------------- ------------- -------------- --------------
Net asset value, end of period $ 9.19 $ 9.09 $ 8.35 $ 7.98 $ 8.46 $ 8.07
============== ============== =============== ============= ============== ==============
Market price, end of period $ 8.38 $ 8.13 $ 7.25 $ 6.87 $ 7.25 $ 7.25
============== ============== =============== ============= ============== ==============
Total Investment Return + 6 (1) 18.93% 13.28% 2.11% 9.46% (13.17)%
Ratios to Average Net Assets/Supplementary
Data:
Net assets, end of period (000s) $279,886 $280,860 $283,354 $286,035 $304,083 $291,463
Operating expenses 0.83%(2) 0.83% 0.86% 0.93% 0.91% 0.81%
Interest expense 2.49%(2) 2.48% 2.47% 2.47% 2.29% 1.34%
Total expenses 3.32%(2) 3.31% 3.33% 3.40% 3.20% 2.15%
Net investment income 5.70%(2) 6.09% 7.16% 6.89% 8.50% 7.90%
Portfolio turnover rate 50% 83% 35% 64% 356% 628%
</TABLE>
+ Total investment return is computed based upon the New York Stock Exchange
market price of the Trust's shares and excludes the effects of brokerage
commissions.
(1) Not Annualized
(2) Annualized
- ----------
See notes to financial statements.
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HYPERION 2002 TERM TRUST, INC.
Notes to Financial Statements
November 30, 1998 (unaudited)
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1. The Trust
Hyperion 2002 Term Trust, Inc. (the "Trust"), which was incorporated under the
laws of the State of Maryland on July 29, 1992, is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, closed-end
management investment company. The Trust expects to distribute substantially all
of its net assets on or shortly before November 30, 2002 and thereafter to
terminate.
The Trust's investment objectives are to provide a high level of current income
consistent with investing only in securities of the highest credit quality and
to return at least $10.00 per share (the initial public offering price per
share) to investors on or shortly before November 30, 2002. The Trust pursues
these investment objectives by investing in a portfolio primarily of
mortgage-backed securities ("MBS") issued or guaranteed by the U.S. Government
or one of its agencies or rated AAA by a nationally recognized rating agency
(e.g., Standard & Poor's Corporation or Moody's Investors Service, Inc.). No
assurance can be given that the Trust's investment objectives will be achieved.
2. Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Valuation of Investments : Where market quotations are readily available, Trust
securities are valued based upon the current bid price for long positions and
the current ask price for short positions. The Trust values mortgage-backed
securities ("MBS") and other debt securities for which market quotations are not
readily available at their fair value as determined in good faith, utilizing
procedures approved by the Board of Directors of the Trust, on the basis of
information provided by dealers in such securities. Some of the general factors
which may be considered in determining fair value include the fundamental
analytic data relating to the investment and an evaluation of the forces which
influence the market in which these securities are purchased and sold.
Determination of fair value involves subjective judgment, as the actual market
value of a particular security can be established only by negotiations between
the parties in a sales transaction. Debt securities having a remaining maturity
of sixty days or less when purchased and debt securities originally purchased
with maturities in excess of sixty days but which currently have maturities of
sixty days or less are valued at amortized cost.
The ability of issuers of debt securities held by the Trust to meet their
obligations may be affected by economic developments in a specific industry or
region. The values of MBS can be significantly affected by changes in interest
rates.
Options Written or Purchased : The Trust may purchase or write options as a
method of hedging potential declines in similar underlying securities. When the
Trust writes or purchases an option, an amount equal to the premium received or
paid by the Trust is recorded as a liability or an asset and is subsequently
adjusted to the current market value of the option written or purchased.
Premiums received or paid from writing or purchasing options which expire
unexercised are treated by the Trust on the expiration date as realized gains or
losses. The difference between the premium and the amount paid or received on
effecting a closing purchase or sale transaction, including brokerage
commissions, is also treated as a realized gain or loss. If an option is
exercised, the premium paid or received is added to the proceeds from the sale
or cost of the purchase in determining whether the Trust has realized a gain or
a loss on the investment transaction.
The Trust, as writer of an option, may have no control over whether the
underlying securities may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
The Trust purchases or writes options to hedge against adverse market movements
or fluctuations in value caused by changes in interest rates. The Trust bears
the risk in purchasing an option, to the extent of the premium paid, that it
will expire without being exercised. If this occurs, the option expires
worthless and the premium paid for the option is a loss. The risk associated
with writing call options is that the Trust may forego the opportunity for a
profit if the market value of the underlying position 2. Significant Accounting
Policies (continued)
increases and the option is exercised. The Trust will only write call options on
positions held in its portfolio. The risk in writing a put option is that the
Trust may incur a loss if the market value of the underlying position decreases
and the option is exercised. In addition, the Trust bears the risk of not being
able to enter into a closing transaction for written options as a result of an
illiquid market.
Financial Futures Contracts : A futures contract is an agreement between two
parties to buy and sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
The Trust invests in financial futures contracts to adjust the portfolio for
fluctuations in value caused by changes in prevailing market interest rates.
Should interest rates move unexpectedly, the Trust may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets. The Trust is at risk that it may not be able to close out a
transaction because of an illiquid secondary market.
Securities Transactions and Investment Income : Securities transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Discounts and premiums on certain securities are
accreted and amortized using the effective yield to maturity method.
Taxes : It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends and Distributions : The Trust declares and pays dividends monthly from
net investment income. Distributions of net realized capital gains in excess of
capital loss carryforwards are distributed at least annually. Dividends and
distributions are recorded on the ex-dividend date. Dividends from net
investment income and distributions from realized gains have been determined in
accordance with income tax regulations and may differ from net investment income
and realized gains recorded by the Trust for financial reporting purposes. These
differences, which could be temporary or permanent in nature, may result in
reclassification of distributions; however, net investment income, net realized
gains and net assets are not affected.
Deferred Organization Expenses : A total of $40,500 was incurred in connection
with the organization of the Trust. These costs were deferred and amortized
ratably over a period of sixty months from the date the Trust commenced
investment operations. As of May 31, 1998, all deferred organization expenses
have been completely amortized.
Cash Flow Information : The Trust invests in securities and distributes
dividends and distributions which are paid in cash or are reinvested at the
discretion of shareholders. These activities are reported in the Statement of
Changes in Net Assets and additional information on cash receipts and cash
payments is presented in the Statement of Cash Flows. Cash, as used in the
Statement of Cash Flows, is the amount reported as "Temporary Bank Overdraft" in
the Statement of Assets and Liabilities, and does not include short-term
investments.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts and amortizing
premiums on debt obligations.
Repurchase Agreements : The Trust, through its custodian, receives
delivery of the underlying collateral, the market value of which at the
time of purchase is required to be in an amount at least equal to the
resale price, including accrued interest.
Hyperion Capital Management, Inc. (the "Advisor") is responsible for determining
that the value of these underlying securities is sufficient at all times. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings commence with respect to the seller of the security, realization of
the collateral by the Trust may be delayed or limited.
3. Investment Advisory Agreement and Affiliated
Transactions
The Trust has entered into an Investment Advisory Agreement with the Advisor.
The Advisor is responsible for the management of the Trust's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Trust. For such services, the Trust
pays a monthly fee at an annual rate of 0.50% of the Trust's average weekly net
assets. During the six months ended November 30, 1998, the Advisor received
$707,139 in investment advisory fees.
The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator has entered into a
sub-administration agreement with Investors Capital Services, Inc. (the
"Sub-Administrator"). The Administrator and Sub-Administrator perform certain
administrative services necessary for the operation of the Trust, including
maintaining certain books and records of the Trust, and preparing reports and
other documents required by federal, state, and other applicable laws and
regulations, and provides the Trust with administrative office facilities. For
these services, the Trust pays to the Administrator a monthly fee at an annual
rate of 0.17% of the first $100 million of the Trust's average weekly net
assets, 0.145% of the next $150 million and 0.12% of any amounts above $250
million. During the six months ended November 30, 1998, the Administrator
received $213,583 in Administration fees. The Administrator is responsible for
any fees due the Sub-Administrator.
Certain officers and/or directors of the Trust are officers and/or directors of
the Advisor, Administrator and Sub-Administrator.
4. Purchases and Sales of Investments
Purchases and sales of investments, excluding short-term securities, U.S.
Government securities and reverse repurchase agreements, for the six months
ended November 30, 1998 were $30,301,019 and $69,849,960, respectively.
Purchases and sales of U.S. Government securities, for the six months ended
November 30, 1998 were $174,051,616 and $154,723,666, respectively. For purposes
of this note, U.S. Government securities include securities issued by the U.S.
Treasury, the Federal Home Loan Mortgage Corporation and the Government National
Mortgage Association.
The federal income tax basis of the Trust's investments at November 30, 1998 was
$381,245,559 which was the same for financial reporting and, accordingly, net
unrealized appreciation for federal income tax purposes was $6,476,553 (gross
unrealized appreciation -- $6,703,251; gross unrealized depreciation --
$226,698). At May 31, 1998, the Trust had a capital loss carryforward of
$31,460,342, of which $14,612,012 expires in 2002, $7,809,791 expires in 2003,
$4,415,068 expires in 2004 and $4,623,471 expires in 2005, available to offset
any future capital gains. However, if the Trust terminates as expected in 2002
the capital loss carryforward must be utilized by 2002 in order for shareholders
to realize a benefit.
5. Borrowings
The Trust may enter into reverse repurchase agreements with the same parties
with whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Trust sells securities and agrees to repurchase them at a
mutually agreed upon date and price. Under the 1940 Act, reverse repurchase
agreements will be regarded as a form of borrowing by the Trust unless, at the
time it enters into a reverse repurchase agreement it establishes and maintains
a segregated account with its custodian containing securities from its portfolio
having a value not less than the repurchase price (including accrued interest).
The Trust has established and maintained such an account for each of its reverse
repurchase agreements. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the Trust may decline
below the price of the securities the Trust has sold but is obligated to
repurchase. In the event the buyer of securities under a reverse
5. Borrowings (continued)
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Trust's obligation to repurchase the securities, and the Trust's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
At November 30, 1998, the Trust had the following reverse repurchase agreements
outstanding:
Maturity in
Zero to 30 days
Maturity Amount, including Interest
Payable $110,447,723
Market Value of Assets Sold
Under Agreements........ $118,102,911
Weighted Average Interest Rate 5.18%
-----
--------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
six months ended November 30, 1998 was approximately $125,641,072, at a weighted
average interest rate of 5.60%. The maximum amount of reverse repurchase
agreements outstanding at any time during the year was $135,894,000 as of
October 14, 1998, which was 32.15% of total assets.
6. Capital Stock
At November 30, 1998, there were 75 million shares of $0.01 par value common
stock authorized. Of the 30,888,439 shares outstanding at November 30, 1998, the
Advisor owned 10,639 shares.
The Trust has in effect a stock repurchase program, whereby an amount of up to
25% of the original outstanding common stock, or approximately 9.1 million
shares are authorized for repurchase. The purchase price may not exceed the
then-current net asset value.
During the six months ended November 30, 1998 and year ended May 31, 1998, the
Trust repurchased totals of 441,600 and 3,051,600 shares of its outstanding
common stock at costs of $3,689,785 and $23,762,315 and average discounts of
approximately 10.3% and 11.2% from its net asset value, respectively. All shares
repurchased either have been or will be retired.
7. Financial Instruments
The Trust regularly trades in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing exposure
to various market risks. These financial instruments include written options and
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes.
The notional or contractual amounts of these instruments represent the
investment the Trust has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
There were no open futures contracts at November 30, 1998.
There was no written option activity for the year ended November 30, 1998.
8. Subsequent Events
The Trust's Board of Directors declared the following regular monthly dividends:
Dividend Record Payable
Per Share Date Date
$0.03958 12/21/98 12/31/98
$0.03958 12/31/98 01/28/99
--------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROXY RESULTS (unaudited)
- -------------------------------------------------------------------------------
During the six month period ended November 30, 1998, Hyperion 2002 Term Trust,
Inc. shareholders voted on the following proposals at a shareholders' meeting on
October 13, 1998. The description of each proposal and number of shares
voted are as follows:
<TABLE>
<S> <C> <C> <C>
Shares Voted Shares Voted
For Without Authority
- -------------------------------------------------------------- ------------------------ ------------------- ---------------------
1. To elect to the Trust's Board of Directors: Andrew M. Carter 26,849,960 439,066
Rodman L. Drake 26,880,599 408,428
- -------------------------------------------------------------- ------------------------ ------------------- ---------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -------------------------------------------------------------- ------------------------ ------------------- ---------------------
2. To select PricewaterhouseCoopers LLP as the Trust's
independent accountants: 26,822,565 125,176 341,286
</TABLE>
YEAR 2000 CHALLENGE (unaudited)
- --------------------------------------------------------------------------------
The Trust could be adversely affected if computers used by the Trust's service
providers do not properly process information dated January 1, 2000 and after.
The Trust's service providers are taking steps to address Year 2000 risks with
respect to computer systems on which the Trust depends. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Trust.
DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
A Dividend Reinvestment Plan (the "Plan") is available to shareholders of the
Trust pursuant to which they may elect to have all dividends and distributions
of capital gains automatically reinvested by State Street Bank and Trust Company
(the "Plan Agent") in Trust shares. Shareholders who do not participate in the
Plan will receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the shares are held in street or other nominee
name, then to the nominee) by the Trust's Custodian, as Dividend Disbursing
Agent.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Trust declares a dividend or determines to make a capital gain
distribution, payable in cash, the participants in the Plan will receive the
equivalent amount in Trust shares valued at the market price determined as of
the time of purchase (generally, the payment date of the dividend or
distribution). The Plan Agent will, as agent for the participants, use the
amount otherwise payable as a dividend to participants to buy shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Plan Agent has completed its purchases, the market
price increases, the average per share purchase price paid by the Plan Agent may
exceed the market price of the shares at the time the dividend or other
distribution was declared. Share purchases under the Plan may have the effect of
increasing demand for the Trust's shares in the secondary market.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for handling the reinvestment of dividends and distributions
are paid by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable on such dividends or
distributions.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from the Plan or upon termination of
the Plan by the Trust, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
A brochure describing the Plan is available from the Plan Agent, State Street
Bank and Trust Company, by calling 1-800-426-5523.
If you wish to participate in the Plan and your shares are held in your name,
you may simply complete and mail the enrollment form in the brochure. If your
shares are held in the name of your brokerage firm, bank or other nominee, you
should ask them whether or how you can participate in the Plan. Shareholders
whose shares are held in the name of a brokerage firm, bank or other nominee and
are participating in the Plan may not be able to continue participating in the
Plan if they transfer their shares to a different brokerage firm, bank or other
nominee, since such shareholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are transferred.
- -------------------------------------------------------------------------------
Hyperion 2002 Term Trust, Inc.
Selected Quarterly Financial Data
(unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net realized and
unrealized gains (losses) Net increase
on investment, short (decrease) in net
Net investment sale, futures and options assets resulting from Dividends and
income transactions operations distributions Share price
-------------- ------------------- ----------------- ------------------ ---------
Quarter ended Total income Amount Per share Amount Per share Amount Per share Amount Per share High Low
- ------------------------------------------------------------------------------------------------------------------------------------
November 2, 1992**
to November 30, 1992$ 1,811,843 $ 1,533,358 0.04 737,934 $ 0.03 $ 2,271,29$ 0.07 - $ - $ 10 $/8 10
February 28, 1993 9,122,966 7,032,751 0.19 (3,681,008) (0.10) 3,351,743 0.09 7,265,759 0.20 10 1/8 9 1/2
May 31, 1993 9,872,116 7,502,266 0.21 (10,302,260) (0.29) (2,799,994) (0.08) 7,265,759 0.20 10 1/8 8 7/8
August 31, 1993 7,900,285 5,891,890 0.17 (7,056,496) (0.19) (1,164,606) (0.02) 7,265,759 0.20 9 7/8 8 1/4
November 30, 1993 7,647,909 6,287,067 0.17 (14,250,814) (0.40) (7,963,747) (0.23 0 6,655,302 0.18 9 3/8 7 1/2
February 28, 1994 7,304,356 5,779,371 0.16 (3,697,312) (0.10) 2,082,059 0.06 6,200,403 0.17 8 7 3/8
May 31, 1994 8,257,401 6,489,914 0.18 (9,318,373) (0.26) (2,828,459) (0.08) 5,876,469 0.17 7 5/8 7
August 31, 1994 8,111,892 6,080,085 0.17 (4,477,491) (0.12) 1,602,594 0.05 5,863,752 0.17 7 3/8 6 3/4
November 30, 1994 8,953,967 6,721,015 0.19 (12,361,939) (0.34) (5,640,924) (0.15) 5,848,698 0.16 7 1/8 6 1/4
February 28, 1995 8,177,423 5,855,585 0.16 11,776,995 0.32 17,632,580 0.48 5,539,380 0.15 7 6 1/2
May 31, 1995 7,992,242 5,503,840 0.15 17,498,730 0.49 23,002,570 0.64 5,389,408 0.15 7 3/8 6 3/4
August 31, 1995 7,720,721 5,165,495 0.15 (1,657,645) (0.05) 3,507,850 0.10 4,939,722 0.14 7 5/8 6 3/4
November 30, 1995 7,757,245 5,135,530 0.14 8,211,190 0.23 13,346,720 0.37 4,713,040 0.13 7 3/8 7
February 29, 1996 7,967,548 5,119,151 0.14 (7,838,546) (0.22) (2,719,395) (0.08) 4,708,389 0.13 7 1/2 7 1/8
May 31, 1996 7,830,152 5,524,086 0.15 (18,033,989) (0.50) (12,509,903) (0.35) 4,705,337 0.13 7 3/8 6 5/8
August 31, 1996 7,973,437 5,540,861 0.16 904,649 0.03 6,445,510 0.19 4,704,739 0.13 7 1/8 6 3/4
November 30, 1996 7,685,737 5,350,099 0.15 19,086,151 0.54 24,436,250 0.69 4,702,621 0.13 7 3/8 6 3/4
February 28, 1997 7,482,318 5,071,417 0.15 (10,119,650) (0.29) (5,048,233) (0.14) 4,667,444 0.13 7 1/2 7
May 31, 1997 7,568,189 5,002,177 0.14 (1,200,908) (0.04) 3,801,269 0.10 4,292,664 0.13 7 1/2 7
August 31, 1997 6,978,930 4,674,227 0.14 10,347,387 0.32 15,021,614 0.46 3,928,855 0.12 8 4/5 7 1/4
November 30, 1997 6,886,541 4,431,862 0.15 4,447,462 0.13 8,879,324 0.28 3,780,768 0.13 8 7 5/8
February 28, 1998 6,334,700 4,138,632 0.13 2,882,131 0.09 7,020,763 0.22 3,685,921 0.12 8 1/8 7 7/8
May 31, 1998 6,354,705 3,969,935 0.13 1,444,661 0.05 5,414,596 0.18 3,672,601 0.12 8 1/8 7 15/16
August 31, 1998 6,426,712 4,058,332 0.13 3,568,613 0.12 7,626,945 0.25 3,685,921 0.12 8 3/8 8 1/16
November 30, 1998 6,327,332 4,001,238 0.14 (1,611,604) (0.06) 2,389,634 0.08 3,614,814 0.12 8 1/2 8 1/4
</TABLE>
* Excludes net effect of shares repurchased.
** Commencement of investment operations.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT ADVISOR AND ADMINISTRATOR CUSTODIAN
HYPERION CAPITAL MANAGEMENT, INC. STATE STREET BANK AND TRUST COMPANY
One Liberty Plaza 225 Franklin Street
165 Broadway, 36th Floor Boston, Massachusetts 02116
New York, New York 10006-1404
For General Information about the Trust: INDEPENDENT ACCOUNTANTS
(800) HYPERION
PRICEWATERHOUSECOOPERS LLP
TRANSFER AGENT 1177 Avenue of the Americas
New York, New York 10036
BOSTON EQUISERVE L.P.
Investor Relations Department LEGAL COUNSEL
P.O. Box 8200
Boston, Massachusetts 02266-8200 SULLIVAN & WORCESTER LLP
For Shareholder Services: 1025 Connecticut Avenue, N.W.
(800) 426-5523 Washington, D.C. 20036
</TABLE>
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Trust may purchase its shares in the
open market at prevailing market prices.
- -------------------------------------------------------------------------------
Officers & Directors
- -------------------------------------------------------------------------------
Andrew M. Carter
Chairman
Lewis S. Ranieri
Director
Robert F. Birch*
Director
Rodman L. Drake*
Director
Garth Marston
Director Emeritus
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Kenneth C. Weiss
Director
Patricia A. Sloan
Director & Secretary
Clifford E. Lai
President
Patricia A. Botta
Vice President
Thomas F. Doodian
Treasurer
* Audit Committee Members
- ----------------------------------------
The accompanying financial statements as of November 30, 1998 were not audited
and, accordingly, no opinion is expressed on them.
This Report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
Hyperion 2002 Term Trust, Inc.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890337
<NAME> HYPERION 2002 TERM TRUST, INC.
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<NUMBER> 0
<NAME> HYPERION 2002 TERM TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 381246
<INVESTMENTS-AT-VALUE> 387722
<RECEIVABLES> 3273
<ASSETS-OTHER> 161
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 391156
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<OTHER-ITEMS-LIABILITIES> 111270
<TOTAL-LIABILITIES> 111270
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<PAID-IN-CAPITAL-COMMON> 295701
<SHARES-COMMON-STOCK> 30447
<SHARES-COMMON-PRIOR> 30888
<ACCUMULATED-NII-CURRENT> 8887
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (31179)
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7301
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<NUMBER-OF-SHARES-REDEEMED> 441
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<ACCUMULATED-NII-PRIOR> 8128
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<PER-SHARE-NAV-BEGIN> 9.09
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 0.07
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 9.19
<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 125641
<AVG-DEBT-PER-SHARE> 4.09
</TABLE>
